US, Britain Issue Warnings Over Chinese Telecom Equipment Maker ZTE

Chinese telecom company ZTE’s pavilion at the Mobile World Congress held in Barcelona, Spain, in February.
Photo:

Toni Albir/EPA/Shutterstock

LONDON—U.S. and British officials both issued warnings over giant Chinese telecommunications-equipment

ZTE Corp.

on Monday, signaling sharply escalating Western scrutiny of the sector.

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British cybersecurity officials warned U.K. phone carriers here to stay clear of ZTE’s equipment and services, citing national-security concerns. The U.S. Commerce Department said it banned American companies from selling products to ZTE because the company violated the terms of a deal last year settling allegations of sanctions busting.

ZTE representatives didn’t immediately comment.

The developments risk crimping ZTE’s business by disrupting the company’s supply of components, like chips, for its large smartphone business.

Britain’s move came as both U.S. national security officials and Congressional leaders have called on American agencies and U.S. allies to strengthen telecom infrastructure from the threat of cyber espionage, particularly from China.

A Congressional report in 2012 labeled Huawei and ZTE national-security threats. American officials say they could be forced by Beijing to infiltrate or cripple telecoms systems reliant on their components.

In their warning Monday to British telecom firms, London officials said they were specifically worried about new Chinese laws they described as giving Beijing “wide ranging powers of compulsion,” according to an official familiar with the warning.

Huawei and ZTE have repeatedly denied they pose national-security threats to the countries where their equipment is sold. Huawei is the world’s biggest telecoms equipment maker by sales. ZTE is No. 4, behind Finland’s

Nokia Corp.

and Sweden’s Ericsson.

Huawei says it is privately held by its employees. ZTE trades publicly on stock exchanges in Shenzhen and Hong Kong, though one of its largest investors is a holding company with ownership stakes held by state-owned companies.

The U.S. has taken a series of recent steps to circumscribe Chinese equipment makers. Earlier this month, for instance, the Federal Communications Commission proposed rules to make it harder for Chinese firms, including Huawei and ZTE, to sell gear to the few small, rural, U.S. providers that use it.

Europe has been a much more accommodating market for Huawei. The company has an especially large presence in the U.K., where it has invested heavily. Addressing British concerns in the past over cyber spying, Huawei agreed years ago to fund a center where its components can be broken down and inspected.

British officials have said they work with Huawei and have been able to manage any cyber security risks. But on Monday, London didn’t offer the same comfort over ZTE.

It warned instead that if ZTE were to become a big supplier in the U.K., too, systems in place to mitigate risks from Chinese suppliers overall might be compromised.

British officials believe one way to manage the risks posed by having Huawei as such a big part of the U.K. telecommunications infrastructure is to have non-Chinese equipment installed alongside the Chinese-made gear. This makes it harder to exploit any accidental or intentional vulnerability in the Chinese technology, they say.

“The UK telecommunications network already contains a significant amount of equipment supplied by Huawei, also a Chinese equipment manufacturer,” wrote

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Ian Levy,

technical director of the U.K.’s National Cyber Security Centre, in a letter to telecommunications firms in the country, according to a person familiar with the letter. “Adding in new equipment and services from another Chinese supplier would render our existing mitigations ineffective,” he wrote.

The NCSC is part of the U.K.’s communications intelligence agency, called GCHQ.

Vodafone Group

PLC, one of the country’s biggest telecommunications services providers, had no immediate comment.

BT Group

PLC, another, said it has partnered with ZTE on limited research projects but those projects didn’t necessarily deploy ZTE gear in the U.K. It said it “takes the security of the U.K.’s critical national infrastructure very seriously and has a robust testing regime in place to ensure that the equipment from all suppliers in our network remains secure.”

Separately in the U.S., the Commerce Department said Monday that ZTE had violated the terms of a previous settlement alleging it illegally evaded sanctions. The department said ZTE agreed last year to combined civil and criminal penalties and forfeiture amounting to $1.19 billion, for allegedly shipping sanctioned telecom gear to Iran and North Korea.

The agency said Monday it has since determined ZTE made false statement during and after the settlement talks and that the company hadn’t disciplined executives involved, as agreed, and instead paid them full bonuses.

It said as a result, ZTE would no longer be able to buy components from U.S. manufacturers. That could pose a significant threat to ZTE’s supply chain. The company uses American parts, like chips made by

Qualcomm Inc.,

for its smartphones. ZTE is a big customer for U.S. technology vendors.

The prospect of losing its supply of U.S. components helped bring ZTE to the negotiating table when it admitted to the sanctions violations last year.

Write to Jason Douglas at jason.douglas@wsj.com and Robert Wall at robert.wall@wsj.com

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